With the rise of cryptocurrency trading, traders can now participate in crypto trading from anywhere across the globe and at any time of the day. However, cryptocurrencies are known for their high volatility, with prices fluctuating dramatically within minutes. Therefore, in many situations, traders cannot respond rapidly enough to price fluctuations to make the best investment decisions. To consistently make the best investments, it would require 24-hour surveillance of trading exchanges and prices. This is where crypto trading bots can help.
What Is A Crypto Trading Bot?
Trading bots are software programs that interact with the crypto exchanges to analyse trading data. They observe the market and automatically execute trades with predefined algorithms.
The true potential of a crypto trading bot lies in consistent and risk-adjusted returns. Fundamentally, a crypto trading bot can capture most of the upside of cryptocurrencies with risk-reduced exposure autonomously. This makes it a highly attractive proposition than simply having a ‘HODL’ strategy.
How Does A Crypto Trading Bot Work?
Each bot has its own set of needs in terms of software and hardware. An investor needs to understand how to best use a crypto trading bot to optimise its influence. Here are a few key components that many crypto trading bots have in common.
Market Data Analysis
This component of the bot saves raw market data from different sources and interprets it. It will then decide whether to buy or sell a specific cryptocurrency asset. Many crypto trading bots allow users to customise which types of data go into the signal generator sector to get refined results.
Market Risk Prediction
This module of the crypto trading bot also uses market data but calculates the potential risk in the market. The bot then decides how much to invest or trade. This possibly is one of the most critical aspects of a crypto trading bot.
This takes the buy or sell signal then decides how much to buy. In other words, should you allocate your entire capital into this trade or just a portion? Should you buy all in one go, or should you average in? Once you know how much you want to buy or sell, the next part is the one that executes the trade.
Bots ensure that the trades are executed as required by the algorithm. As soon as the price threshold is reached, bots execute the trade near instantaneously, reducing the chances of price changes. This makes them better than humans, as humans require some time to execute trades.
Benefits Of Crypto Trading Bots
They eliminate emotions
Unlike humans, bots make trades based on data and market trends. All emotions are, therefore, eliminated from the decision-making process. This translates into less stress and anxiety for the trader and, consequently, greater peace of mind by delegating trading to crypto bots.
They are active 24/7
The crypto market never sleeps, and crypto bots operate around the clock. So you can trade even you are asleep or otherwise occupied. The crypto bot will react to price fluctuations and execute orders you have programmed into your trading strategy.
Faster than manual trading
When specified correctly, crypto bots can analyse and execute trades across multiple exchanges and cryptocurrencies. Trading bots respond immediately to changing market conditions and generate orders automatically, including stop loss and profit targets.
Copy-trading or social trading
For those without trading skills, this function is the possibility to copy the strategies of professional traders to their crypto account and benefit from the know-how of these professionals. Many novices use crypto bots only with the function of copy trading.
Backtesting trading strategies
Backtesting allows you to evaluate and refine a trading strategy and determine the average amount that you can hope to gain (or lose) per unit of risk. You can, therefore, test trading strategies before trading in the real markets.
Types Of Crypto Trading Bots
Both beginners and experts can use a crypto trading bot to trade cryptocurrencies. There are plenty of products available with indicators, signals, and risk-management features that will fit specific strategies you may have in mind for your trades. Here are a few different types of trading bots.
Trend trading bots
Trend trading bots work by following a trend over a certain period, in some cases up to several months. A moving average is often used to determine where the price may go next after it has reached this level on the chart. The bot signals when the conditions are correct for entering and exiting position based on technical indicators such as Bollinger Bands or EMA (exponential moving average). They make use of both short-term trading and long-term trading strategies.
Arbitrage bot is essentially an automated program that observes price differences on different exchanges and then buys bitcoin on the one exchange where it’s cheap and sells it at the other where it is expensive, pocketing the difference in profits. This way, traders can increase their holding significantly by utilising this strategy. They are primarily used for Bitcoin trading, but they can also be used when trading altcoins.
Coin lending bots
Coin lending bots are used to automatically lend your cryptocurrencies when they increase in value. If you configure these bots correctly, they will lend money for specific amounts in return at different times that fit into your strategy. You also have many options available, including configuring what currency is used and how long it’s gone until you’re paid back with interest on top of any extra gains during spikes in coin value up above the threshold amount set by yourself before starting this bot.
Market maker bots
The market maker bot places an order to earn money for its owner by selling to investors at a higher value than its actual price. To do this, it utilises something called ‘orderbook spread’. The more actively an asset is traded, the wider and larger quantities of returns become possible due to increased profits earned from placing different orders compared to what’s actually offered in exchanges.
Are Crypto Trading Bots Safe To Use?
Yes, they are. The crypto trading bot offers significant benefits for both new and experienced traders. But it is recommended that you check with your exchanges before using bots on them as each exchange might have different rules about what is allowed to do. You need to analyze these trading bots before you start using them and understand their potential. New traders often make common mistakes like following incorrect signals, investing in cryptocurrencies without understanding the project, and taking suggestions from people who do not really know what they are talking about.
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